Monthly vs. Biweekly Mortgage Payments: What to Choose

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Is this the time to consider biweekly mortgage payments? It might be. Many homeowners have read about the strategy of dividing that monthly payment into two parts and are wondering whether it is actually likely to help them in the long run versus the common monthly mortgage. To figure that out, you'll need to understand all of the pros and cons of each and apply them to your own situation.

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Biweekly Mortgage Payments

The classic American mortgage is a monthly affair, meaning you write 12 checks every calendar year. These days, lots of people are talking about biweekly mortgage payments. This term is a little confusing given that biweekly can mean twice a week (as in a biweekly publication), but biweekly can also mean every two weeks, and that is exactly what the term "biweekly mortgage payments" means: splitting your monthly mortgage in two and paying that amount every two weeks. The first will go largely toward interest and the second toward principal balance.

This may sound complicated, and it does require a bit more effort. Why should you consider changing the monthly mortgage habit? The simple answer is that it might save you some money. However, that is by no means a sure thing. Evaluate your situation carefully before you jump in and keep in mind that some of the claimed benefits may not work for you.

Shortening Your Mortgage

The first benefit you'll hear about when it comes to biweekly mortgage payments is that you will pay less money over the life of the mortgage. This is because many months have more than four weeks. Although there are 12 months in every year, there are 52 weeks. Given that, a monthly mortgage plan will result in 12 monthly payments, while a biweekly mortgage plan will result in 26 biweekly payments, which is the equivalent of 13 monthly payments. Paying an extra month's mortgage payment every year pays off your mortgage quicker.

It is indisputable that making the equivalent of 13 monthly payments a year will pay off your mortgage quicker, but not so fast — you need to check your mortgage agreement to see if it permits biweekly payments. Sometimes, lenders impose penalties for prepaying principal amounts, and these fees might reduce the benefit considerably.

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Moreover, paying every two weeks is not the only way to achieve this benefit. You could simply pay monthly, adding 1/12 of your monthly payment to each check. For example, if your monthly payment is $1,200, paying $1,300 each month gets you an extra $1,200 toward the mortgage each year and so would a once-a-year extra payment of $1,200. If you can afford the extra payment, you can achieve the savings without the hassle of paying every two weeks.

Paying Less Interest

Another monetary benefit of biweekly mortgage payments involves paying less interest. In a mortgage with a monthly payment plan, every payment is divided between principal and interest. The mortgage sets out the percentage of each payment that goes toward interest and the percentage that goes toward principal. Initially, the payments go largely to interest, but later in the home loan, more and more of the payments go toward principal.

If the lender permits a biweekly payment plan, the first payment in a month goes toward interest and the second largely toward principal. This reduces the loan principal more quickly. Since interest is assessed on the outstanding loan balance, the biweekly plan that reduces that loan balance quicker will generate less interest over the life of the mortgage.

This argument looks great in theory, but practically, it may not work out the way you want. Many mortgage lenders don't offer a biweekly mortgage plan. If yours doesn't, the company servicing the loan is likely to hold the first payment until the second one arrives and then send them in together for processing. This will still give you 13 months of payments rather than 12 each year, but it will not reduce your principal any quicker than a normal monthly mortgage payment plus one extra payment.

Improving Your Credit Score

Making timely monthly payments is a good way to build up your credit score. So, will making timely biweekly mortgage payments get you there quicker? That's the argument, but alas, this is not likely to happen.

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If a mortgage lender offers a biweekly payment plan, it will set up the borrower on an automatic withdrawal plan. This will make sure your payments are timely, and timely payments are good for your credit score. However, paying your mortgage is still counted as one factor. You get points for paying your mortgage on time, not for every individual timely payment. If you need an automatic withdrawal plan to make sure you will pay on time, you can easily set up the same procedure for monthly payments.

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Disadvantages to Consider

Many of the benefits of biweekly mortgage payments depend on whether your mortgage lender offers a biweekly payment plan. Be sure you do not confuse this with what is known as a "bimonthly payment plan," which is authorizing two half payments every month for the life of the loan. This eliminates the possibility of prepayment penalties, but it also eliminates a central benefit of biweekly payments: the extra mortgage payment every year. Two half payments every month will still total 12 full monthly payments a year, not the 13 that will result from biweekly payments.

If your mortgage lender does offer a biweekly payment schedule, you need to ask about any fees involved. Some lenders offering biweekly payment plans impose fees, charging you in order to allow the two payments every month. These fees must be taken into account when you weigh any savings from the program.

When a lender doesn't offer a biweekly mortgage payment plan, some homeowners look to third-party providers that claim to make this happen. The third party takes money from your account every two weeks and hands it over to the lender. However, this doesn't always work out as you hope, and it is critical to read the small print. Some of these companies take your money every two weeks but only pay the lender once a month. The "extra" payment is sent to the lender at the end of the year. In the meantime, the company earns interest on your money.

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This is definitely a situation to avoid, but even if that is not the case with a particular intermediary, these companies are in business to make money. Their services will cost you setup fees as well as monthly fees. The lender might also impose fees to bring the third party into the contract. All of these fees can greatly reduce the benefits of biweekly mortgage payments.

Another unpleasant possibility is that the third-party intermediary might have financial or legal issues. If it disappears or goes bankrupt and doesn't turn over your mortgage payments to the lender, your credit score will get dinged. The mortgage lender expects loan payments, and failure to pay — for whatever reason — is a default of the loan. The lender is not likely to care about this third-party issue.

Any homeowner on a tight budget needs to be careful about committing to biweekly mortgage payments. The reason biweekly mortgage payments shorten the life of the mortgage is because you pay the equivalent of one extra monthly payment per year. That means you'll pay a bit more every month. This may work fine for some homeowners, but for borrowers struggling to pay monthly bills, it may be hard to maintain the higher payments if unexpected expenses suddenly arise or if a source of income disappears.

Advantages of Monthly Mortgage Payments

Most mortgage payment programs in this country require monthly mortgage payments. This is the payment option that is most familiar and most common. In fact, according to Vittana.com, some 90 percent of United States mortgages are 30-year, fixed-rate mortgages requiring monthly mortgage payments.

The fact that monthly payment options are common and predictable doesn't mean that they are always better. It does mean that you won't have to pay an extra out-of-pocket fee to get this mortgage payment plan. There are some other advantages when compared to biweekly mortgages.

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First, the monthly mortgage plan requires lower annual payments than the biweekly mortgage plan. That is, a homeowner with a monthly mortgage makes 12 payments a year, while one with a biweekly mortgage plan pays the equivalent of 13 monthly payments a year. That means you may be able to qualify for a bigger mortgage (meaning a bigger or better house) with a monthly payment plan than with a biweekly plan. This will depend on your debt-to-income ratio. A borrower with little debt may not feel the pinch, but a borrower whose debt-to-income ratio is already pretty high might want to consider this factor.

With a biweekly mortgage payment plan, you hope to pay less interest. While paying less interest has an undeniable appeal, interest payments are also useful financially. Current tax laws in the U.S. allow you to deduct mortgage interest from your taxes. To the extent that monthly mortgage payment plans cost you more in interest than biweekly plans, they also reduce tax liabilities.

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Monthly Payment Disadvantages to Consider

As you compare monthly mortgage payment plans to biweekly plans, keep the interest charges in mind. Even if you lock in a low fixed interest rate for the life of your mortgage, you'll ultimately pay more interest with a monthly mortgage payment plan than with a biweekly mortgage payment plan. You might pay less each month with a monthly plan, but over the life of the loan, you will be paying more. That's because paying off a mortgage quicker results in less interest, assuming there is no prepayment penalty.

The amount is quite significant if the lender allows biweekly payments without fees. For example, consider a $300,000 home purchase price with a $30,000 down payment and 30-year financing on the rest of the purchase price at 4.1 percent interest. With a monthly mortgage payment plan, this will cost you $1,305 a month, with total payments on the loan equaling $469,669. With a biweekly payment plan, the payments will be $652 every two weeks, averaging $1,418 a month for a total of $436,665. That's a savings of $33,004 — a hefty amount that you could use elsewhere.

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references

From Alaska to California, from France's Basque Country to Mexico's Pacific Coast, Teo Spengler has dug the soil, planted seeds and helped trees, flowers and veggies thrive. A professional writer and consummate gardener, Spengler has written about home and garden for Gardening Know How, San Francisco Chronicle, Gardening Guide and Go Banking Rates. She earned a BA from U.C. Santa Cruz, a law degree from U.C. Berkeley's Boalt Hall, and an MA and MFA from San Francisco State. She currently divides her life between San Francisco and southwestern France.

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